While you’re mapping out your plan for compliance with the new standards, here’s the step-by-step process you’ll need to follow for implementation.
While you’re mapping out your plan for compliance with the new standards, here’s a step-by-step process you’ll need to follow for implementation.
Your corporate finance and real estate teams will ultimately have most of the responsibility while preparing for and complying with the new FASB standards, but covering all aspects of compliance is an effort that spans multiple departments and functions.
The IT staff will often be involved in the process to implement controls over relevant lease data that is needed to comply with the new standards, as well as controls related to judgments, estimates and management reviews.
Procurement and facilities teams will be involved because non-real estate leases such as office and manufacturing equipment will be included in the new calculations.
Investor relations, bankers, PR and legal professionals will need to be informed about the impact of the new lease accounting standards on the balance sheet. HR also needs to be involved, as the company may need to increase staff or redeploy existing personnel to meet project deadlines. Executive compensation tied to financial performance may also need additional review and potential revision.
Most organizations will need to make investments in additional technology, services and/or human resources to comply with FASB 842 or IFRS 16. A key component of compliance will involve IT spending. The clear majority (92 percent) of respondents from The Great Accounting Challenge: KPMG’s 2016 Accounting Change Survey believe they will need to upgrade their IT system or invest in new technology because of the new lease accounting guidelines. In addition, 77 percent say that technology represents the most challenging part of compliance.
Companies will also need to budget for implementation, training and post-installation follow-up. Be sure to have a detailed plan for allocating financial resources.
Many organizations have a management system for real estate leases, but equipment and other lease contracts may be scattered throughout. The first step to compliance is identifying every lease and assessing the accuracy of lease data in existing systems.
To make the correct classification and complete the calculations, there is a wide range of data needed from any lease agreement in force for 12 months or longer. Some information is not commonly abstracted into lease accounting systems today, so organizations will need to determine if internal resources or a professional services partner will perform this abstraction.
In most cases, existing technology will not be sufficient to support the new standards. Some companies will need an entirely new lease administration solution, while others will need to purchase additional software from current vendors. In either case, the decision should be made early in the process so that data acquisition and implementation can begin quickly. You’ll want to evaluate criteria that includes feature functionality, price and support services.
Certain lease terms may be better for organizations under the new standards. For example, some leases include service rent—which does not have to be included in the capitalization schedule—but don’t say exactly how much of the gross rent is service rent. Leasing teams may want to request more clearly defined lease terms in the future and may even want to renegotiate existing agreements. The practice of leasing will receive greater attention and audit review, so approval requirements and internal audit plans may need to be revised.
Once vendor selection and lease judgements have been made, solution implementation and integration should be fully in motion. Companies should expect this process to take 60 days or more depending on support terms and team availability. Once data is loaded and systems are integrated, you’ll likely want to test the systems for two full cycles.
Astute finance and real estate professionals see complying with the new standards as a strategic opportunity to optimize lease accounting and finance practices. Centralizing lease agreements provides the chance to use the consolidated lease data, improve capital project management, streamline operational maintenance, and enhance space planning, financial reporting and other areas.
In the next article in our Leasing series, we will discuss the most common frequently asked questions regarding the new standards.
blumshapiro is presenting this series of articles in collaboration with AMTdirect, a North Carolina-based software provider that offers the most robust lease administration and accounting compliance technology on the market, helping clients organize and manage real estate and other contracts while complying with the complex new FASB ASC 842, IFRS 16, and GASB lease accounting standards.
blum is the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with a team of over 450, offers a diversity of services, which include auditing, accounting, tax and business advisory services. blum serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.
If you have questions or require further clarification, please contact Jennifer Hogencamp, Leasing Implementation Leader at 401.330.2735 or firstname.lastname@example.org.